GXO Logistics, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q and other written reports and oral statements we make from time to time contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. In some cases, forward-looking statements can be identified by the use of forward-looking terms such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target,” “trajectory” or the negative of these terms or other comparable terms. However, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Factors that might cause or contribute to a material difference include those discussed below and the risks discussed in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). All forward-looking statements set forth in this Quarterly Report on Form 10-Q are qualified by these cautionary statements, and there can be no assurance that the results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, as filed with the SEC on February 18, 2025 (the “2024 Form 10-K”), and the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Business Overview GXO Logistics, Inc., together with its subsidiaries (“GXO,” the “Company,” “our” or “we”), is the largest pure-play contract logistics provider in the world and a foremost innovator in the industry. We provide our customers with high-value-added warehousing and distribution, order fulfillment, e-commerce, reverse logistics and other supply chain services differentiated by our ability to deliver technology-enabled, customized solutions at scale. Our customers rely on us to move their goods with high efficiency through their supply chains — from the moment goods arrive at our warehouses through fulfillment and distribution, and the management of returned products. Our customer base includes many blue-chip leaders in sectors that demonstrate high growth and/or durable demand, with significant growth potential through customer outsourcing of logistics services. Our business model is asset-light and historically resilient in cycles, with high returns, strong free cash flow and visibility into revenue and earnings. The vast majority of our contracts with customers are long-term in nature, and our warehouse lease arrangements generally align with contract length. The Company has both fixed-price contracts (closed book or hybrid contracts) and cost-plus contracts (open book contracts). Most of our customer contracts contain both fixed and variable components. The fixed component is typically designed to cover warehouse, technology and equipment costs, while the variable component is determined based on expected volumes and associated labor costs. Under fixed-price contracts, the Company agrees to perform the specified work for a pre-determined price. To the extent the Company’s actual costs vary from the estimates upon which the price was negotiated, the Company will generate more or less profit. Cost-plus contracts provide for the payment of allowable costs incurred during the performance of the contract plus a specified margin. 20 On April 29, 2024, we completed the acquisition of Wincanton plc (“Wincanton”), a U.K. logistics provider specializing in both warehousing and transportation solutions (“the Wincanton Acquisition”). The Wincanton Acquisition is subject to a review by the Competition and Markets Authority in the U.K., which is expected to be completed by June 25, 2025. Due to the acquisition of Wincanton in 2024, comparisons in our results of operations between 2025 and 2024 are less meaningful. For additional information regarding our acquisitions see Note 5. “Acquisition” in Condensed Consolidated Financial Statements. Results of Operations Three Months Ended March 31, 2025 compared with the Three Months Ended March 31, 2024 Three Months Ended March 31, (In millions, except percentages) 2025 2024 $ Change % Change Revenue $ 2,977 $ 2,456 $ 521 21 % Direct operating expense 2,558 2,056 502 24 % Selling, general and administrative expense 261 249 12 5 % Depreciation and amortization expense 109 92 17 18 % Transaction and integration costs 22 19 3 16 % Restructuring costs and other 17 16 1 6 % Regulatory matter and litigation expense 66 63 3 5 % Operating loss (56) (39) (17) 44 % Other income (expense), net (5) 6 (11) n/m Interest expense, net (32) (13) (19) n/m Loss before income taxes (93) (46) (47) n/m Income tax (expense) benefit (2) 10 (12) n/m Net loss $ (95) $ (36) $ (59) n/m n/m - not meaningful Revenue for the three months ended March 31, 2025 increased by 21%, or $521 million, to $3.0 billion compared with $2.5 billion for the same period in 2024. The increase primarily reflects $487 million from the Wincanton Acquisition. Also, revenue increased due to growth in our business. Foreign currency movement decreased our revenue by $33 million for the three months ended March 31, 2025. Direct operating expense is comprised of both fixed and variable expenses and consists of operating costs related to our warehouses, including personnel costs, rent expenses, utility costs, equipment maintenance and repair costs, transportation costs, costs of materials and supplies, and information technology expenses. Direct operating expense for the three months ended March 31, 2025 increased by 24%, or $502 million, to $2.6 billion compared with $2.1 billion for the same period in 2024. The increase primarily reflects $447 million from the Wincanton Acquisition. Also, Direct operating expense increased due to growth in our business. As a percentage of revenue, Direct operating expense for the three months ended March 31, 2025, was 85.9% compared with 83.7% for the same period in 2024. The increase in Direct operating expense as a percentage of revenue was primarily related to the Wincanton Acquisition. Selling, general and administrative expense (“SG&A”) primarily consists of salary and benefits costs for executive and administrative functions, professional fees, bad debt expense and legal costs. SG&A for the three months ended March 31, 2025 increased by $12 million, to $261 million compared with $249 million for the same period in 2024. SG&A increased primarily due to the Wincanton Acquisition. Depreciation and amortization expense for the three months ended March 31, 2025 increased by $17 million, to $109 million compared with $92 million for the same period in 2024. Amortization expense was $29 million and 21 $19 million for the three months ended March 31, 2025 and 2024, respectively. Depreciation and amortization expense increased primarily due to the Wincanton Acquisition. Transaction and integration costs for the three months ended March 31, 2025 and 2024 were $22 million and $19 million, respectively and primarily related to the Wincanton Acquisition. Restructuring costs and other are primarily related to severance, including projects to optimize finance, human resources and information technology functions, and are not associated with customer attrition. Restructuring costs and other for the three months ended March 31, 2025 were $17 million compared with $16 million for the same period in 2024. For the three months ended March 31, 2025, we recorded $66 million of a regulatory matter related to a contingency for the deductibility of value-added tax payments made by us to certain third-party service providers challenged by the Italian authorities. For the three months ended March 31, 2024, we recorded $63 million of litigation expense related to a dispute between us and one of our customers which was settled in the second quarter of 2024. For additional information regarding our regulatory and legal matters see Note 14. “Commitments and Contingencies” in Part I, Item 1 of this Quarterly Report on Form 10-Q . Other income (expense), net decreased primarily due to unrealized loss on foreign currency contracts. Other income (expense), net was as follows: Three Months Ended March 31, (In millions, except percentages) 2025 2024 $ Change % Change Net periodic pension income $ 5 $ 3 $ 2 67 % Foreign currency gain (loss): Realized foreign currency option and forward contracts loss — (1) 1 (100) % Unrealized foreign currency option and forward contracts gain (loss) (10) 3 (13) n/m Foreign currency transaction and remeasurement gain — 1 (1) (100) % Total foreign currency gain (loss) (10) 3 (13) n/m Other income (expense), net $ (5) $ 6 $ (11) n/m n/m - not meaningful Interest expense increased primarily due to debt incurred for the Wincanton Acquisition in April 2024. Interest expense, net was as follows: Three Months Ended March 31, (In millions, except percentages ) 2025 2024 $ Change % Change Debt and capital leases $ 43 $ 24 $ 19 79 % Cross-currency swaps (9) (8) (1) 13 % Interest income (2) (3) 1 (33) % Interest expense, net $ 32 $ 13 $ 19 n/m n/m - not meaningful Loss before income taxes for the three months ended March 31, 2025, was $93 million compared with $46 million for the same period in 2024. The increase in loss before income taxes was primarily due to higher SG&A expense, higher depreciation, amortization and interest expense, and lower other income, net. Income tax for the three months ended March 31, 2025, was a $2 million income tax expense compared with a $10 million income tax benefit for the same period in 2024. Our effective tax rate for the three months ended March 31, 2025, was an expense on a pre-tax loss of (2.7)%, compared to a benefit on a pre-tax loss of 21.1% for the 22 same period in 2024. The change to our effective tax rate was primarily driven by non-deductible transaction costs and a non-deductible regulatory matter. For the three months ended March 31, 2025 and 2024, the Pillar Two Global Anti-Base Erosion rules issued by the Organization for Economic Co-operation and Development (“Pillar Two”) did not have a material impact on our income tax expense/benefit. Pillar Two did not have a significant impact on our fiscal 2024 and we currently do not expect it to have a significant impact on our fiscal 2025 income tax expense. Liquidity and Capital Resources Our ability to fund our operations and anticipated capital needs is reliant upon the generation of cash from operations, supplemented as necessary by periodic utilization of our revolving credit facility and factoring programs. Our principal uses of cash in the future will be primarily to fund our operations, working capital needs, capital expenditures, repayment of borrowings and strategic business development transactions. The timing and magnitude of our new contract start-ups can vary and may positively or negatively impact our cash flows. We continually evaluate our liquidity requirements and capital structure in light of our operating needs, growth initiatives and capital resources. As of March 31, 2025, we held cash and cash equivalents of $288 million and restricted cash of $94 million, and we had $949 million of borrowing capacity, net of letters of credit under our revolving credit facilities . As of March 31, 2025, we deposited €84 million ($91 million as of March 31, 2025) of restricted cash in relation to a contingency. In April 2025, we made a partial payment of €15 million ($17 million) against this contingency funded from the designated bank account reducing the restricted cash balance. For additional information regarding our regulatory and legal matters see Note 14. “Commitments and Contingencies” in Part I, Item 1 of this Quarterly Report on Form 10-Q . On February 18, 2025, our board of directors authorized and announced the repurchase of up to $500 million (the “Repurchase Plan”) of our common stock. The Repurchase Plan permits shares of common stock to be repurchased from time to time in management’s discretion, through a variety of methods, including a 10b5-1 trading plan, open market purchases, privately negotiated transactions or otherwise. The timing and number of shares of common stock repurchased will depend on a variety of factors, including price, general business and market conditions, alternative investment opportunities and funding considerations. We will fund the repurchases with existing cash, borrowings on our revolving credit facility, and/or other financing sources. The Repurchase Plan does not obligate the Company to repurchase any specific number of shares of common stock and may be suspended or discontinued at any time. As of March 31, 2025, the remaining authorization under the Repurchase Plan was approximately $390 million. We believe that our cas h and cash equivalents on hand, cash flows from operations, the revolving credit facilities, and the use of our factoring programs will provide sufficient liquidity to operate our business and fund our current and assumed obligations for at least the next 12 months. For additional information regarding our cash requirement from lease obligations, indebtedness and contractual obligations, see Note 4. “Leases”, Note 7. “Debt and Financing Arrangements” and Note 14. “Commitments and Contingencies” in Part I, Item 1 of this Quarterly Report on Form 10-Q. 23 Financial Condition The following table summarizes our asset and liability balances: March 31, December 31, (In millions, except percentages) 2025 2024 $ Change % Change Total current assets $ 2,629 $ 2,641 $ (12) — % Total long-term assets 8,693 8,625 68 1 % Total current liabilities 3,370 3,189 181 6 % Total long-term liabilities 5,048 5,042 6 — % There were no material changes in our total current assets, total long-term assets, and other long-term liabilities as of March 31, 2025, compared to December 31, 2024. As of March 31, 2025, accrued expenses within total current liabilities included $66 million related to the accrual of a regulatory matter described in Note 14. “Commitments and Contingencies” in Part I, Item 1 of this Quarterly Report on Form 10-Q. Cash Flow Activity Our cash flows from operating, investing and financing activities, as reflected on our Condensed Consolidated Statements of Cash Flows, are summarized as follows: Three Months Ended March 31, (In millions, except percentages) 2025 2024 $ Change % Change Net cash provided by operating activities $ 29 $ 50 $ (21) (42) % Net cash used in investing activities (77) (82) 5 (6) % Net cash used in financing activities (66) (8) (58) n/m Effect of exchange rates on cash and cash equivalents 11 (5) 16 n/m Net decrease in cash, restricted cash and cash equivalents $ (103) $ (45) $ (58) n/m n/m - not meaningful Operating Activities Cash flows provided by operating activities for the three months ended March 31, 2025 decreased by $21 million compared with the same period in 2024. The decrease was primarily due to less cash generated from income partially offset by lower working capital consumption for the three months ended March 31, 2025. Investing Activities Investing activities used $77 million of cash for the three months ended March 31, 2025 and $82 million for the same period in 2024. During the three months ended March 31, 2025, we used $78 million of cash to purchase property and equipment and received $1 million of cash from sales of property and equipment. During the three months ended March 31, 2024, we used $73 million of cash to purchase property and equipment, $15 million to purchase Wincanton shares and received $6 million of cash from sales of property and equipment. 24 Financing Activities Financing activities used $66 million and $8 million of cash for the three months ended March 31, 2025 and March 31, 2024, respectively. The primary use of cash from financing activities during the three months ended March 31, 2025 was $106 million used to repurchase shares of our common stock pursuant to the Repurchase Plan, $11 million to repay finance lease obligations and $6 million in payments for employee taxes on net settlement of equity awards, partially offset by $56 million of net borrowings under revolving credit facilities. The primary uses of cash from financing activities during the three months ended March 31, 2024 were $8 million to repay finance lease obligations and $4 million in payments for employee taxes on net settlement of equity awards. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Contractual Obligations As of March 31, 2025, the Company’s contractual obligations had not materially changed compared with December 31, 2024. Critical Accounting Policies and Estimates There have been no material changes to the critical accounting policies and estimates as previously disclosed in “Critical Accounting Policies” in Part II, Item 7 of our 2024 Form 10-K. Accounting Pronouncements Information related to new accounting standards is included in Note 1. “Basis of Presentation and Significant Accounting Policies” in Part I, Item 1 of this Quarterly Report on Form 10-Q.